Does high cash compensation compromise the independence of outside directors? Evidence from directors' dissenting votes in China

Using data on directors' voting behaviour in board meetings in China, we examine whether high cash compensation compromises outside directors' independence in markets with weak investor protection. The results show that highly paid outside directors are more likely to vote against proposals sponsored by executives, particularly in firms with weaker monitoring of executives. Highly paid outside directors are also positively associated with cash dividends and future firm performance. Overall, the evidence suggests that high cash compensation reflects the market value of reputable outside directors and reputation concerns motivate outside directors to maintain their independence and challenge executives in board meetings.